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Issue Number: IR-2011-113

In an annual reminder to taxpayers, the Internal Revenue Service announced that it is looking to return $153.3 million in undelivered tax refund checks. In all, 99,123 taxpayers are due refund checks this year that could not be delivered because of mailing address errors.

Undelivered refund checks average $1,547 this year.

Taxpayers who believe their refund check may have been returned to the IRS as undelivered should use the “Where’s My Refund?” tool on IRS.gov. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Last year, more than 78.4 million taxpayers chose to receive their refund through direct deposit. Taxpayers can receive refunds directly into their bank account, split a tax refund into two or three financial accounts or even buy a savings bond.

The IRS also recommends that taxpayers file their tax returns electronically, because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds. Nearly 8 out of 10 taxpayers chose e-file last year. E-file combined with direct deposit is the best option for taxpayers to avoid refund problems; it’s easy, fast and safe.

The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and does not ask for personal or financial information through email. Such messages are common phishing scams. The agency urges taxpayers receiving such messages not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that can infect their computers. The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the “Where’s My Refund?” tool.

The Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2012. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];

three (3) percent for underpayments;

five (5) percent for large corporate underpayments; and

one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

The 3 percent rate also applies to estimated tax underpayments for the first calendar quarter in 2012 and for the first 15 days in April 2012.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. Further, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year.

A new report from a Republican lawmaker details how, under the current Tax Code, the federal government is giving away billions of dollars to millionaires, subsidizing their lifestyles with taxes paid by the less well-to-do.

The report, entitled “Subsidies of the Rich and Famous,” was released by Sen. Tom Coburn, R-Okla., a deficit hawk who has campaigned to end a variety of tax subsidies, particularly for ethanol. In the new report, Coburn points to a variety of government subsidies and tax credits that go toward people with adjusted gross incomes of $1 million and up, including $9 billion worth of retirement checks, $316 million in farm subsidies, $89 million for preservation of ranches and estates, $75.6 million in residential energy tax credits, $74 million worth of unemployment benefits, and $7.5 million to compensate for damages caused by emergencies to property that should have been insured.

In addition, according to the report, millionaires claimed $27.7 billion in mortgage interest deductions, $64.3 billion in rental expenses deductions, $21 billion in deductions for gambling losses, $607.7 million in business entertainment expenses deductions, and $128 million in canceled debt deductions.

All and all, over $9.5 billion in government benefits have been paid to millionaires since 2003, according to Coburn’s office. In addition, millionaires borrowed $16 million in government-backed education loans to attend college. On average, each year, his report found that millionaires enjoy benefits from tax giveaways and federal grant programs totaling $30 billion. As a result, almost 1,500 millionaires paid no federal income tax in 2009.

A new report from a Republican lawmaker details how, under the current Tax Code, the federal government is giving away billions of dollars to millionaires, subsidizing their lifestyles with taxes paid by the less well-to-do.

The report, entitled “Subsidies of the Rich and Famous,” was released by Sen. Tom Coburn, R-Okla., a deficit hawk who has campaigned to end a variety of tax subsidies, particularly for ethanol. In the new report, Coburn points to a variety of government subsidies and tax credits that go toward people with adjusted gross incomes of $1 million and up, including $9 billion worth of retirement checks, $316 million in farm subsidies, $89 million for preservation of ranches and estates, $75.6 million in residential energy tax credits, $74 million worth of unemployment benefits, and $7.5 million to compensate for damages caused by emergencies to property that should have been insured.

In addition, according to the report, millionaires claimed $27.7 billion in mortgage interest deductions, $64.3 billion in rental expenses deductions, $21 billion in deductions for gambling losses, $607.7 million in business entertainment expenses deductions, and $128 million in canceled debt deductions.

All and all, over $9.5 billion in government benefits have been paid to millionaires since 2003, according to Coburn’s office. In addition, millionaires borrowed $16 million in government-backed education loans to attend college. On average, each year, his report found that millionaires enjoy benefits from tax giveaways and federal grant programs totaling $30 billion. As a result, almost 1,500 millionaires paid no federal income tax in 2009.

The Internal Revenue Service earns about $198 million a year in fees from installment agreements and $40 million in fees fromtax return transcripts, but the reason for some of the user fees is vague, according to a new report.

The report, from the Government Accountability Office, noted that user fees are a growing part of the IRS’s budget. While they currently fund less than 2 percent of the IRS’s budget, fee collections are expected to reach $309 million in fiscal year 2012 and recently involved nearly 20 million transactions with taxpayers.

The IRS charges user fees for various activities, including helping taxpayers comply with their tax liabilities, clarifying the application of the Tax Code to particular circumstances, and ensuring the quality of paid preparers of tax returns, among others.

However, last fiscal year, two fees accounted for more than 80 percent of the total. The largest by far was the user fee for installment agreements. The agreements allow taxpayers who cannot pay their full tax liability the option to pay it off with smaller monthly payments over a period of up to 60 months. The installment agreement service is offered to most taxpayers for $105, with lower rates available for low-income taxpayers and those who opt for a direct debit agreement. This service generated $198 million, or 68 percent of the IRS’s total retained user fee collections.

The second most lucrative user fee was for income verification express services, also known as IVES, in which the IRS provides two-business-day processing and electronic delivery of tax return transcripts for users, such as mortgage lenders and other financial market entities, in order to confirm the income of a borrower during the processing of a loan application. The IRS charged a fee of $2.25 for each IVES transcript request, generating $40 million, or 14 percent of total retained fee collections.

President Obama signed into law on 11/21/2011 a bill that provides tax credits for hiring veterans and repeals a 3 percent tax withholding requirement on government contractors.

The bill was passed with overwhelming support Wednesday by the House after earlier approval by the Senate. Both provisions had been part of Obama’s jobs bill, the American Jobs Act, but had originated in bills with bipartisan support.

The veteran jobs bill signed into law includes a version of Baucus’s tax credit for businesses that hire unemployed veterans. The legislation will provide a $5,600 tax credit for hiring long-term unemployed veterans who have been unemployed for six months or longer in the past year, $2,400 for hiring short-term unemployed veterans who have been unemployed for between four weeks and six months in the past year, $4,800 for service disabled veterans hired within one year of being discharged, and credits of up to $9,600 for hiring veterans with service-related disabilities who have been unemployed for six months or longer in the past year.

The Internal Revenue Service sent the majority of claims for the adoption tax credit to auditors this year because they lacked the necessary documentation, even though it had options that could have enabled it to reduce the number of costly correspondence audits and issue refunds to parents faster while still maintaining a robust enforcement strategy, according to a new report.

The report, released Monday by the Government Accountability Office, found that as of August 2011, 68 percent of the nearly 100,000 returns on which taxpayers claimed the adoption credit in the 2011 filing season were sent to a correspondence audit at the IRS. However, of the approximately 35,000 returns on which audits have been completed as of August, the IRS only assessed additional taxes approximately 17 percent of the time. The equivalent rate for all correspondence audits in 2010 was 86 percent.

According to IRS officials, data for audits completed through September 2011 showed that an adoption credit correspondence audit takes an average of 74 calendar days. The delayed refunds, according to adoption agency officials, can create difficulties for families expecting to cover the costs of an adoption with the refund.

Issue Number: Special Edition 2011-08

The IRS reminds homeowners that they still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.

The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

• The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.

• The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

• The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

• Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

• No cap exists on the amount of credit available except for fuel cell property.

• Generally, labor costs are included when figuring this credit.

Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.

Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

The Internal Revenue Service has provided special transitional relief to banks and other payment settlement entities required under a 2008 law to begin withholding 28 percent of payments if they are unable to verify a taxpayer identification number for a retailer.

Payment processors are supposed to begin reporting payment card and third-party network transactions to the IRS on a new information form known as the Form 1099-K and withhold 28 percent of the money from retailers and others for whom a taxpayer identification number could not be verified, starting next year. However, under transitional relief granted by the IRS, they will not need to begin the withholding until 2013.

According to the Housing Assistance Tax Act of 2008, payment-processing companies that handle credit and debit card transactions were scheduled to begin reporting in early 2012 payment card and third-party network transactions that occurred in 2011. The law added Section 6050W to the Tax Code for reporting of payment card and third party network transactions, in order to increase transparency in relation to electronic payments and transfers. It was expected to raise $9.5 billion in extra revenue over 10 years.

Under the law, payment processors were supposed to withhold 28 percent of the payments they made to retailers and other entities for which they lacked verified taxpayer identification numbers.

However, in Notice 2011-88, the IRS postponed for one year the effective date for potential backup withholding obligations for payments made in settlement of payment card and third party network transactions. All payments made in settlement of payment card transactions are required to be reported under Section 6050W of the Tax Code. Payments made in settlement of third party network transactions, however, are required to be reported only if the amount paid exceeds $20,000 and the aggregate number of transactions exceeds 200 with respect to any payee within a calendar year.

Small business owners are feeling more confident about their success over the next two years, but many are still having trouble accessing capital and loan. A new survey by the Hartford insurance company found that 70 percent of the small business owners they polled feel successful, even as they face challenging conditions.

The national economy continues to put pressure on the majority of small business owners, with 57 percent indicating it has had an impact on their business. When asked what prevents their business from being successful, small business owners noted that financing is a particular area of pain. Specifically, 34 percent of respondents said that obtaining a loan or other capital is difficult.

Despite high unemployment rates, finding qualified talent remains a challenge for 59 percent of the small business owners polled by the Hartford.

Small business owners remain optimistic about their success-even in a tough economy- because profits aren’t always the definition of success. According tothesurvey, 82 percent said they place great importance on doing something they feel passionate about and enjoy. While 77 percent acknowledged that increasing the profitability of their business year over year was very important, only 18 percent said this was the most important factor in defining success.